Major international trade agreements may have hit a huge snag. The European courts have ruled that corporations are not above the law.

One of the major criticisms levied against trade agreements is the ISDS (Inter-State Dispute Settlement) provisions. Under some agreements, corporations can sue a country should their regulations get in the way of their profits or future potential profits. The lawsuits would be held in international tribunals run independently of any one country. Many criticize these provisions because it could potentially allow corporations to upend laws they don’t like and effectively operate above the law.

Techdirt is pointing to a Court of Justice of the European Union ruling that suggests corporations are still bound by a countries law.

In the ruling, Achmea, a health insurance company, sued Czechoslovakia for changing its laws surrounding healthcare insurance. The lawsuit was filed under an international trade agreement’s dispute settlement provision (In this case, the FEU trade agreement):

In 2004 Slovakia opened its sickness insurance market to private investors. Achmea, an undertaking belonging to a Netherlands insurance group, set up a subsidiary in Slovakia with a view to offering private sickness insurance services there. However, in 2006 Slovakia partly reversed the liberalisation of its sickness insurance market, and prohibited in particular the distribution of profits generated by sickness insurance activities.

In 2008 Achmea brought arbitration proceedings against Slovakia under the BIT, on the ground that the prohibition was contrary to the agreement and had caused it financial damage. In 2012 the arbitral tribunal found that Slovakia had indeed infringed the BIT, and ordered it to pay Achmea damages in the amount of approximately €22.1 million.

Not content with the ruling, the Slovakia government took the matter to the European court system instead. The case wound up in the highest court. At issue is the question of whether or not an international trade agreement can trump a countries law. Here’s part of the court ruling:

the Court observes that such judicial review can be exercised by the national court concerned only to the extent that national law permits, a condition not completely satisfied in the present case, as German law provides only for limited judicial review in this field. The Court points out that, although the review of arbitral awards by the courts of the Member States may under certain conditions legitimately be limited in scope in the context of commercial arbitration proceedings,5 that rule cannot be applied to the arbitration proceedings at issue in the present case. While the former proceedings originate in the freely expressed wishes of the parties, the latter derive from a treaty by which Member States agree to remove from the jurisdiction of their own courts, and hence from the system of judicial remedies which the EU Treaty requires them to establish in the fields covered by EU law, disputes which may concern the application or interpretation of EU law.

On those grounds, the Court finds that, by concluding the BIT, Slovakia and the Netherlands established a mechanism for settling disputes which is not capable of ensuring that those disputes will be decided by a court within the judicial system of the EU, only such a court being able to ensure the full effectiveness of EU law.

In those circumstances, the Court concludes that the arbitration clause in the BIT has an adverse effect on the autonomy of EU law, and is therefore incompatible with EU law.

Of course, the immediate question at this stage is, what does this mean to international trade agreements occurring around the world? Well, since the Trans-Pacific Partnership (TPP) has recently been in the news, thoughts tend to immediately to to that agreement. Unfortunately, non of the signatories are members of the TPP that we are aware of.

However, other trade agreements do cover European member states. This includes the Comprehensive Economic and Trade Agreement (CETA) which is an agreement between Canada and the European Union. CETA also has ISDS provisions embedded into the agreement. As such, the only countries not impacted by the ruling are countries outside of the European Union. In this case, Canada would sit on the sidelines as the ISDS provisions may not apply to the rest of the signing countries.

In a number of cases, this ultimately closes a loophole corporations could use to operate above the law. For example, if a major record label decides a country not implementing the failed three strikes law sues for lost profits or lost future potential profits, then European countries can simply refuse to pay damages thanks to the court ruling. Of course, examples can easily extend far beyond issues of digital rights, but it can impact digital rights as well.

At any rate, this is a huge wrench being thrown into the corporate machine here. It makes no sense for Canada to abide by such provisions when European members don’t have to follow those same provisions in the first place. In fact, nothing is stopping top courts in other countries from ruling in similar ways. Whether this new found protection spreads to other countries remains to be seen, but this is certainly an encouraging development for a lot of stakeholders.